The FCRs are constrained by the ratings assigned to the sovereign (‘BB-’/‘B’/‘Negative’), reflecting its base of operations in Jordan and its exposure to the Jordanian sovereign–mainly in the form of government paper and balances with the Central Bank of Jordan (CBJ). Accordingly, the FCRs are highly correlated with Jordan’s creditworthiness. The Support Rating is set at ‘3’, in view of the high likelihood of official support from the CBJ as well as from the institutional shareholders in case of need.

The Financial Strength Rating (FSR) is affirmed at ‘BBB’, with a ‘Negative’ Outlook. The FSR is supported by the Bank’s solid and improved capitalisation, the moderate increase in loan-loss reserve (LLR) coverage of non-performing loans (NPLs), and the still sound liquidity despite tightening in recent years. Also supporting the FSR is the Bank’s still satisfactory operating profitability, notwithstanding the decline. JKB’s solid capital base coupled with satisfactory operating profitability continues to provide an effective risk buffer against credit losses, the latter as demonstrated by stepped-up provisioning in recent years. The FSR is constrained by the still relatively high NPL ratio, which remained above the sector average despite some improvement, as well as an increase in past due not impaired (PDNI) loans less than 90 days to a moderately high level. Furthermore, the challenging operating environment, brought on by increased credit and geopolitical risks in the region, continues to weigh on the asset quality of the Bank. The FSR is also constrained by the high borrower concentrations, which in turn elevate credit risk.

The ‘Negative’ Outlook on the ratings for JKB (and all other Jordanian banks) was assigned in June 2017, following a similar change in the Outlook on the Sovereign rating. Although JKB has adeptly managed its balance sheet in the face of continued elevated credit and geopolitical risks, CI Ratings notes that in common with other Jordanian banks, JKB’s ratings are increasingly pressured by heightened sovereign risk factors, as well as the challenging operating environment. As such, the ratings for JKB and all other Jordanian banks could be lowered if Jordan’s FCRs are lowered.

JKB has an established and successful business franchise in Jordan and has evolved into a medium-sized institution with a well recognised brand name, commanding significant market shares in loans and deposits in the Jordanian banking system. However, as a result of the effects of the economic slowdown, JKB’s credit portfolio had suffered a setback in past years, as evidenced by the increase in NPLs together with much weakened LLR coverage. More recently in 2016 NPLs grew just moderately − mainly due to new classified NPLs in the real estate sector–while at end Q3 2017 NPL growth was broadly flat due to NPL rescheduling. This combined with the moderate growth in gross loans resulted in a minor improvement in the NPL ratio, although the latter remained above the improved average for the sector.

Although management recently informed CI that NPLs are expected to decline noticeably in the near term thanks to accelerated write offs and off-balance sheet transfers, further growth is not to be ruled out given the significant increase in PDNI <90 loans. The Bank’s LLR cover for NPLs continued to improve in the first nine months of 2017—from a moderate level—chiefly reflecting the significant increase in LLRs. JKB’s renegotiated loans, which would otherwise be reported as NPLs, continued to make up a very low share of gross loans at end Q3 2017. The loan book continued to exhibit high—albeit reduced—concentrations by individual borrowers reflecting the focus on corporate banking. Concentration risk is expected to improve over time as and when the share of retail loans in the credit portfolio increases from the current modest level.

JKB’s consistently solid capital adequacy ratio (CAR) remains well above the CBJ’s minimum requirement, despite the sharp decline in net profitability in 2016 and higher dividend payout ratio. Internal capital generation, in turn, continued to slip to a low level in 2016. Nonetheless, the Bank’s solid capital base and enhanced CAR, together with satisfactory operating profitability, provides an effective buffer in case of further growth in NPLs amid elevated credit risk in Jordan’s economy. JKB’s free capital was impaired by unprovided NPLs to a rather small extent, highlighting its solid capital base and improved LLR cover.

Following three years of improving trend JKB’s liquidity tightened in 2016 due to a decline in customer deposits as the Bank opted to grow only the less expensive current and savings accounts at the expense of costly time deposits. Competition for customer deposits has intensified in the market, resulting in a system-wide tightening of liquidity. Although customer deposits growth was flat in Q1-Q3 2017, JKB’s liquidity remained satisfactory reflecting ample funds deployed into central bank placements and liquid government securities. The latter, although not listed in an active market, can be repo’d with the CBJ in case of need. Interbank liabilities funded a still moderate portion of the balance sheet. Concentration by individual depositor declined at end Q3 2017, partly reflecting the decline in GRE deposits, as was the case with other Jordanian banks.

Gross income generation fell in 2016 before rebounding to a sound level in Q1-Q3 2017 thanks to a stronger net interest margin, despite the fall in non-interest income (mainly lower fees and commissions together with net unrealised losses on equities). However, operating profitability declined to a still satisfactory level in Q1-Q3 2017 owing to accelerated growth in operating expenses mainly related to impairments and other expenses on seized assets. Similarly, net profit also declined especially during 2016 owing to elevated risk charges, with a further fall seen in Q1-Q3 2017 as provisions continued to erode a significant proportion of operating profit. As a result, the Bank’s ROAA fell to a moderate and slightly below the sector average level in 2016, with a further minor decline seen in Q1-Q3 2017.

Established in 1976, JKB served as the first example of improving and expanding economic relations between Jordan and Kuwait. On 31 December 2015 the Bank had announced that Kuwait-based Burgan Bank had transferred its 50.93 per cent ownership in JKB to Al Rawabi International Co., an entity also owned by Kuwait Projects Company Holding (KIPCO). The Bank’s other major shareholder is the Social Security Corporation (Jordan, 21.04 per cent). JKB remains primarily a corporate bank and has a modest retail banking operation. The Bank reported consolidated assets of JOD2,725mn (USD3.8 billion) and total capital of JOD467mn (USD658mn) at end-September 2017.